Federal Supreme Court ruled on Income Tax Treatment of Treasury Shares
In a long-awaited landmark decision, the Federal Supreme Court (“Bundesgericht”) has ruled on the question of whether the reissue of treasury shares by a company is subject to corporate income tax. The court concluded that no taxable capital gains arise from the reissue of treasury shares since there is no legal basis in the tax law to deviate from the treatment in the financial statements (9C_135/2023, in German). Despite this important decision, however, the Federal Supreme Court has not yet clarified all aspects.
Fact Pattern
The holding company of a reinsurance group domiciled in Zurich and listed on the stock exchange had repurchased treasury shares, among others, for an employee participation programme. As part of the allocation of these treasury shares to employees, a positive difference arose between the historic acquisition costs from previous repurchases and the allocation value to employees. The taxpayer recognised the difference directly in equity and not in the income statement. The Federal Supreme Court had to deal with the question on whether this difference was subject to corporate income tax. The Cantonal Tax Administration of Zurich and the SFTA referred to the analysis of the Swiss Tax Conference (in German/French) and argued that the reissue of treasury shares should be subject to tax regardless of how they are recognised in the statutory financial statements.
Court Decision
The court first concluded that the accounting treatment (directly recognised in equity) was not objectionable and in line with the Swiss Code of Obligations. Treasury shares are not considered an asset, and thus the reissue of treasury shares cannot be considered income from a tax perspective.
Article 58 para. 1(c) Federal Direct Tax Law (“FDTL”, German/French) stipulates that "income" not included in the income statement ("den der Erfolgsrechnung nicht gutgeschriebenen Erträgen" / "les produits qui n’ont pas été comptabilisés dans le compte de résultats") shall be subject to taxation. Since the reissue of treasury shares, however, does not result in an income, the above-quoted article is not a legal basis for the difference to be classified as taxable. Furthermore, the Federal Supreme Court has also rejected the linking of corporate income tax with personal income tax and withholding tax. The interconnection between the withholding tax and personal income tax, respectively, on the one hand and corporate income tax on the other appears to be insufficiently robust to justify the recognition of a correction provision in art. 58 para. 1 c FDTL (in conjunction with art. 20 para. 1 c FDTL, art. 4a Withholding Tax Law) and to breach the principle of "tax follows accounting". In the event of treasury shares being reissued, this would constitute a tax-free capital contribution transaction in accordance with article 60(a) FDTL.
Former Court Decisions
The Federal Supreme Court dealt with the tax treatment of treasury shares in other decisions:
- Capital Tax: Treasury shares are not part of the company’s equity and hence not subject to capital tax (2C_119/2018, in German);
- VAT: Sale of treasury shares qualifies as capital contribution and hence a transaction outside the scope of VAT (2C_891/2020, in German)
Deloitte’s View
The Federal Supreme Court’s judgement is a surprisingly short, but a landmark decision in favour of the taxpayer. Especially in the canton of Zurich, assessments of various taxpayers were suspended due to this pending court case. In our experience, many taxpayers recognize the difference on reissue of treasury shares in the income statement rather than directly in equity as in this case. In the court decision the judges considered the reissue of shares – as part of an employee participation programme – a tax-neutral capital contribution based on art. 60(a) FDTL. In our view, it is unclear whether it can be generally concluded from this court decision that, regardless of the accounting treatment and the reasons for the reissue of the treasury shares, differences arising from the reissue of treasury shares are always tax-free due to their character as a capital contribution. To be on the safe side, companies are advised to consider a change of their accounting practice prospectively. Importantly, it is not possible to change the accounting treatment retrospectively as the financial statements have been audited and approved by the shareholders at the general meeting. Recognizing such a difference directly in equity would generally be in line with international accounting standards (e.g., IFRS, US GAAP) and, together with corporate tax neutrality, would provide a consistent result in line with the OECD Model Rules on Global Minimum Tax.
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